Many first-time home-buyers find themselves confused by the term “closing costs.” You may understand the need to pay a down payment and the commission to your real estate agent, but a lot of other service providers also add their fees to what you’ll pay at the end of your transaction for closing costs.
What Are Closing Costs, Exactly?
The majority of real estate-related service providers work for no upfront costs with the understanding they’ll be paid at closing.
How Much Are Closing Costs?
Closing costs can be as little as one or as high as eight percent of the value of the home you’re buying. However, average closing costs range between two and five percent.
When you apply for your loan, your lender will provide you an estimated total of closing costs. Three days before closing, your lender will give you a closing disclosure statement stating actual costs.
Who Pays Closing Costs?
Usually, the buyer accepts responsibility for the closing costs, which you pay out-of-pocket, separate from the amount you borrow for your home mortgage loan. However, it is possible to negotiate those terms so that the buyer pays closing costs or agrees to pay half.
It Starts with Your Lender
The person representing the financial institution who works with you directly is called the loan processor who guides you through the application process receives a fee for his or her service.
That loan processor retrieves a credit score to determine whether or not you qualify to borrow money. The credit score comes at a cost, which the bank pays up-front and recovers at closing. The bank may require an application fee, which typically covers the cost of ordering the credit report and assembling the information necessary to process your loan.
Underwriters at the bank from which you’re borrowing take the application and documents from the loan processor and research to verify and validate that the information you provided is accurate. The underwriter then processes the loan documents accordingly.
Your lender, at your request, may charge points. One point is equal to one percent of the value of the home you’re buying. Buyers opt to pay points at closing to lower the amount they pay in monthly mortgage payments.
The financial institution may also require that you pay up-front interest for interest that accrues between the time of closing and your first mortgage payment.
Appraisals, Inspections, and Surveys, and Flood Determinations
The lender requires that the home you’re buying is surveyed to determine boundary lines, inspected to be declared in good condition and free of pests, and appraised to determine the fair market value and to satisfy the bank that the property is worth what you’re borrowing. Each of these service providers collects their fees at closing. Furthermore, in some regions of the country, properties may be in a flood zone, which requires additional insurance. The flood determination declares whether your home is or is not in a flood zone.
There are multiple types of insurance that you may need to have, and for which you’ll need to pay a portion of in advance at closing. You will need to obtain homeowner’s insurance. If your down payment was less than twenty percent of the value of the house you’re buying, you might also be required to have private mortgage insurance. When the property you’re buying resides in a flood zone, you may need to purchase additional flood insurance.
There are also two forms of title insurance you may need to buy – one to protect the lender, and one to protect you if problems with the title arise.
That’s Just the Beginning
There are several other service providers and costs associated with your real estate transaction including attorneys, escrow agents, couriers, clerks, taxes, title checks, filing fees, and more.
There’s much more involved with the purchase of a house than getting your loan, hiring an agent, finding a house you love, and making an offer the seller accepts. There are layers and layers of services, providers, and documents that need to be gathered and processed along the way. By knowing in advance what to expect and having time to prepare financially, your home buying experience can be more exciting and less confusing.
Your real estate agent is the best source of information about the local community and real estate topics. Give Maggie Clemens a call today at 619-800-1145 to learn more about local areas, discuss selling a house, or tour available homes for sale.